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International Trade
Chapter 1
Introduction to International Trade
1.1
The definition of international trade
International trade can be defined as the
exchange of goods and services produced in one
country (or district) with those produced in another
country(or district).
The reasons for international trade
A. The uneven distribution of natural resources
B. International specialization
C. Different Patterns of demand among nations
D. Economies of scale
E. Innovation or variety of style
Even the IBM PC Isn’t All-American
Total
manufacturing
cost: US$860
Portion made
overseas:
US$625
In u.s. owned plants $230
In foreign-owned plants
$395
$860
$625
73%
Distribution of Manufacturing Parts
Monitor
Korea
Semiconductors
Japan
Power supply
Japan
Graphics Printer
Japan
Floppy Disk Drives
Singapore
Assembly of disk drives
U.S
Keyboard
Japan
Case and final Assembly
U.S
Even the Boeing 777 Isn’t All American
The suppliers come from U.S. ,Japan, France,
Canada, Italy, Australia, South Korea, United
Kingdom
So it is increasingly difficult to say what is a “U.S.”
product; what is “Japanese” product.
1.2. The history of international trade development
The first beginning of international trade
The development of international trade in different
social period
1.3. The different forms of international trade
1.3.1.Export Trade / Import Trade / Transit Trade
Re-Export / Re-Import;
Net Export / Net Import
1.3.2. General Trade / Special Trade
General Trade: country territory. (Japan,United Kingdom,
Canada Australia, East Europe)
General Import / General Export
Special Trade: Customs Territory.(German, Italy, Swiss)
1.3.3. Visible Trade / Invisible Trade
1.3.4 Direct Trade / Indirect Trade / Entrepot Trade
1.3.5 Trade by Roadway / Trade by Seaway /
Trade by Airway / Trade by Mail Order
1.3.6 Free-Liquidation Trade / Barter Trade
1.4 . Another basic concepts about international trade
1.4.1. amount of foreign trade
total amount of import and export for a country in
definite period.
1.4.2. amount of international trade
total amount of export for all countries in definite
period.
1.4.3. trade balance
favorable balance: export >import
adverse balance: export<import
(surplus)
(deficit)
1.4.4. commodity structure
primary commodities
Industry commodities
(finished goods)
1.4.5. factors of production
a. capital,
b. human resources or labor
c. property resources including land
1.5 The difference between domestic trade and
international trade
1.5.1. different effect to economy development
1.5.2. different environment
social and culture / law and economic policy
currency system
1.5.3. difficult movement for factors of production among nations
1.5.4. more risks when you do international business
Credit;
exchange rate;
Business;
Transportation;
Price;
Politics.
1.6 国际商务环境
外运公司
保险公司
进口商
生产厂家
出口商
商检局
银行
海关
税务局
Chapter 2 Foundations of Modern Trade Theory
2.1 The Mercantilism
The mercantilists’ views on trade
If a country could achieve a favorable trade balance (a
surplus of exports over imports), it would enjoy payments
received from the rest of the world in the form of gold and
silver. The more precious metals a nation had, the richer
and more powerful it was.
To promote a favorable trade balance, the mercantilists
advocated government regulation of trade. Tariffs, quotas,
and other commercial policies were proposed by the
mercantilists to minimize imports in order to protect a
nation’s trade position.
During the period 1500-1800
In Europe (England, Spain, France, Portugal, and the
Netherlands)
A group of men (merchants,bankers,government officials,
and even philosophers)
William Stafford, 1554—1612
The early stage mercantilism -----The theory of currency balance
Thomas Mum, 1571—1641
The later period mercantilism ----The theory of trade balance
2.2. The theory of absolute advantage
2.2.1 Adam Smith, (1723 – 1790)
a classical economist, was leading advocate
of free trade (Laissez-Faire)
“Inquiry into the Nature and causes of the Wealth of
Nations” 1776
---- The wealth of Nations
2.2.2 The main view on trade
Trade is based on absolute advantage and benefits both
nations. When each nation specializes in the production of
the commodity of its absolute advantage and exchanges
part of its output for the commodity of its absolute
disadvantage, both nations end up consuming more of
both commodities.
2.2.3 Illustration of absolute advantage
Before Specialization in production
X product
output
Labor time
Y product
output
Labor time
A country
4
1
1
1
B country
3
2
2
1
5 Labor time ----- 7X + 3Y
After Specialization in production
Y product
X product
output
Labor time
output
Labor time
A country
8
2
0
o
B country
0
0
6
3
5 Labor time ------ 8X + 6Y > 7X + 3Y
But if one nation has absolute advantage for
both commodities,how to do?
X product
output
A
country
B
country
4
3
Y product
Labor
time
1
2
output
3
Labor
time
1
2
1
2.3 The theory of comparative advantage
2.3.1 Economists - David Ricardo
(1772-1823)
He was born in 1772 and was the third of 17 children. His
parents were very successful and his father was a wealthy
merchant banker. They lived at first in the Netherlands and then
moved to London. David himself had little formal education and
went to work for his father at the age of 14. However, when, at
the age of 21, he married a Quaker (against his parents wishes)
he was disinherited and so set up on his own as a stockbroker.
He was phenomenally successful at this and was able to retire at
42 and concentrate on his writings and politics.
He developed many important areas of economic theory much of
the theory he developed is still used and taught today.
“Principles of Political Economy and Taxation” 1817
2.3.2. The key views on trade
(The law of comparative advantage)
Even if a nation has an absolute cost disadvantage in the
production of both goods, a basis for mutually beneficial
trade may still exist.
The less efficient nation should specialize in the production
and export of the commodity in which it has a comparative
advantage (where its absolute disadvantage is less)
The more efficient nation should specialize in and export
that commodity in which it is relatively more efficient (where
its absolute advantage is greater).
Before specialization in production
X product
output
Labor time
Y product
output
Labor time
A country
4
1
3
1
B country
3
2
2
1
5 Labor time: 7x + 5y
After specialization in production
X product
Y product
output
Labor time
output
Labor time
A country
8
2
0
0
B country
0
0
6
3
5 Labor time: 8x + 6y > 7x + 5y
2.3.3 The gains from trade
U.S.
U.K.
Wheat (unit/man-hour)
6
1
Cloth (unit/man-hour)
4
2
If trade is possible
6W > 4C (since 6w=4c in the united states)
2C > 1W (since 2c=1w in the united kingdom)
so, 12C > 6W > 4C
Suppose the United States could exchange 6W for 6C with
the United Kingdom
The United States would then gain 2C (or save 1/2 hour of labor time)
The United Kingdom gain 6C (or save three hours of labor time)
So both nations can gain from the trade.
2.3.4 A lot of simplifying assumptions:
a. only two nations and two commodities
b. free trade
c. perfect mobility of labor within each nation but immobility
between the two nations
d. constant costs of production
e. no transportation costs
f. no technical change
g. the labor theory of value
either labor is the only factor of production or labor is used
in the same fixed proportion in the production of all
commodities.
labor is homogeneous
2.4. The opportunity cost theory
2.4.1. the definition of the opportunity cost
The opportunity cost of a commodity is the amount of a
second commodity that must be given up to release just
enough resources to produce one additional unit of the first
commodity.
2.4.2. the law of comparative cost
The nation with the lower opportunity cost in the
production of a commodity has a comparative advantage
in that commodity; and a comparative disadvantage in the
second commodity.
U.S.
U.K.
Wheat (unit/man-hour)
6
1
Cloth (unit/man-hour)
4
2
In the U.S.A. 6w/4c=1w/? ?=2/3(c)
So the opportunity cost of wheat is two-thirds (2/3) of a unit
of cloth.
In the U.K. 1w/2c=1w/? ?= 2 c
So the opportunity cost of wheat is two (2) of a unit of cloth
The opportunity cost of wheat is lower in the united states
than in the united kingdom.
The united states would have a comparative cost advantage
over the united kingdom in wheat.
2.4.3. Transformation schedules
production possibility curve;
production possibility frontier
This schedule shows various alternative combinations of
two goods that a nation can produce when all of its factor
inputs (land, labor, capital, entrepreneurship) are used in
their most efficient manner.
Production possibility schedules for wheat and cloth
in the United States and the United Kingdom Under
constant costs
United States
Wheat
Cloth
cloth
United
Kingdom
Wheat
United States
Cloth
120
180
150
120
90
60
30
0
0
20
40
60
80
100
120
60
50
40
30
20
10
0
0
20
40
60
80
100
120
100
80
60
40
20
0
30
60
90
wheat
120
150
180
United States
Wheat
180
150
120
90
60
30
0
Cloth
0
20
40
60
80
100
120
cloth
United
Kingdom
Wheat
60
50
40
30
20
10
0
United Kingdom
Cloth
0
20
40
60
80
100
120
120
100
80
60
40
20
0
20 40
60
wheat
cloth
cloth
United States
United Kingdom
120
120
100
80
100
80
60
60
40
40
20
20
0
30
60
90
wheat
120
150
180
0
20 40
60
wheat
For each 30W that the United States gives up, just enough
resources are released to produce an additional 20C. That is,
30W=20C ,so 1W=2/3C
Thus,the opportunity cost of one unit of wheat in the United
States is 2/3C
cloth
cloth
United States
United Kingdom
120
120
100
80
100
80
60
60
40
40
20
20
0
30
60
90
wheat
120
150
180
0
20 40
60
wheat
In U.S.A
Marginal rate transformation MRT= Cloth / Wheat = slope
= 120/180 = 2/3
Same, the opportunity cost of wheat in the U.K. is 1W=2C
Marginal rate transformation MRT= Cloth / Wheat = slope
= 120 / 60 = 2
2.4.4. Opportunity Costs and relative commodity prices
On the assumptions that prices equal costs of
production and that the nation does produce both some
wheat and some cloth, the opportunity cost of wheat
= the price of wheat relative to the price of cloth
In the United States
In the United Kingdom
Pw / Pc = 2/3
Pw / Pc = 2
Pw / Pc (U.S) < Pw / Pc(U.K.)
it is a reflection of the United states’s comparative
advantage in wheat.
Similarly, Pc/Pw(U.K.) < Pc/Pw(U.S.)
it is a reflection of the United Kingdom’s comparative
advantage in cloth.
2.5 The basis for and the gains from trade
under constant costs
2.5.1 The basis for trade under constant costs
The difference in relative commodity prices between the
two nations is a reflection of their comparative advantage
and provides the basis for mutually beneficial trade.
constant opportunity costs
a. The factors of production are perfect substitutes for each
b. All units of a given factor are of the same quality
2.5.2 Illustration of the gains from trade
cloth
cloth
United States
United Kingdom
B’
120
120
E
70
60
50
40
A
A’
E’
B
0
90
wheat
110
180
0
40
60 70
wheat
specialization can result in production gain
180W + 120C > (90+40)W + (60+40)C
if the U.S. exchanges 70w for 70c with the U.K, (trade)
it ends up consuming at point E (110w + 70c) , gain 20W + 10 C
U.K. ends up consuming at E’ and gains 30 W + 10 C
So, trade can result in consumption gains for both countries.
2.6 Comparative advantage with more
than two commodities
Commodity
A
B
C
D
E
Price in the U.S.
$2
4
6
8
10
Price in the U.K.
￡6
4
3
2
1
￡1=$2
￡1=$3
$12
8
6
4
2
$18
12
9
6
3
If the exchange rate between the dollar and the pound is
￡1 = $2
U.S will export commodities A and B; U.K. ----- E,D
If ￡1 = $ 3
U.S. will export A.B.C;
U.K. will export E,D
2.7 Comparative advantage with more than
two nations
Nation
Pw / Pc
A
1
B
C
2
D
3
E
4
5
If the equilibrium Pw / Pc = 3
Nation A, B will export wheat to Nations and E in exchange
for cloth.
If a trade equilibrium Pw/Pc = 4, Nations A,B,C will export
wheat to Nation E in exchange for cloth
If the equilibrium Pw/Pc =2 with trade, ?
Chapter 3 The Standard Theory of International Trade
3.1. The Production Frontier with Increasing Costs
Increasing opportunity costs mean that the nation must
give up more and more of one commodity to release
just enough resources to produce each additional unit of
another commodity.
y
Nation 1
A
y1
y2
y3
y4
y1y2<y2y3<y3y4< y4y5
- y
y5
0
10
30
50
70
xB
90 110 130
x
y
140
120
Nation 2
B’
100
80
60
X1x2<x2x3<x3x4
A’
40
20
x
X4 X3 X2X1
Production Frontiers of Nation 2 with increasing costs
3.1.2 Reasons for increasing opportunity costs and
different Production frontiers
a. Resources or factors of production are not homogeneous
b. Resources or factors of production are not used in the
same fixed proportion or intensity in the production of
all commodities.
c.
The difference in the production frontiers of two
nations is due to the fact that the two nations have
different factor endowments or resources at their
disposal and /or use different technologies in
production.
3.2 Community Indifference Curves
3.2.1 Illustration of community indifference curves
A community indifference curve shows the various
combinations of two commodities that yield equal
satisfaction to the community or nation.
Y
100
A
T
E
III
80
B
N
H
C
60
II
D
I
40
Nation 1
20
0
10
30
50
70
90
X
3.2.2 The marginal Rate of Substitution (MRS)
MRS of X for Y in consumption refers to the amount of Y
that a nation could give up for one extra unit of X and still
remain on the same indifference curve.
In Nation 1 ,the substitution of x for y ,MRS(N) > MRS(A)
The decline in MRS or absolute slope of an
indifference curve is a reflection or the fact that the
more of X and the less of Y a nation consumes;
The declining slope of the curve reflects the diminishing
marginal rate of substitution (MRS) of X for Y in
consumption.
3.3. Equilibrium in Isolation
3.3.1. Illustration of Equilibrium in Isolation
Nation 1
y
A
60
I
PA=1/4
B
x
0
10
30
50
70
90 110 130
In the absence of trade (or autarky), a nation is in equilibrium
when it reaches the highest indifference curve possible given
its production frontier.
3.3.2. Equilibrium Relative Commodity Prices and
Comparative Advantage
The equilibrium relative commodity price in isolation is
given by the slope of the common tangent to the
nation’s production frontier and indifference curve at
the autarky point of production and consumption.
PA = Px / Py=1/4
PA’ = Px / Py = 4
PA < PA’
So, Nation 1 has a comparative advantage in commodity
X and Nation 2 in commodity Y.
3.4. The basis for and the Gains from trade with
increasing costs
3.4.1.Illustrations
With trade, Nation 1 moves from point A to point B in production. By
then exchanging 60X for 60Y with Nation 2 Nation 1 ends up
consuming at point E(on indifference curve)
Thus, Nation 1 gains 20X and 20Y from trade. A ---- E
A.
With trade, each nation specializes in
producing
the commodity of its comparative
advantage and faces in creasing opportunity costs.
B.
Specialization in production proceeds until
relative commodity prices in the two nations are
equalized at the level at which trade is in
equilibrium.
3.4.2. Equilibrium relative Commodity Prices with trade
The process of specialization in production continues
until relative commodity prices (the slope of the
production frontiers) become equal in the two nations
PB = PB’
The equilibrium relative commodity price with trade is
the common relative price in both nations at which
trade is balanced
3.4.3. Incomplete Specialization
Under constant costs, both nations specialize completely
in production of the commodity of their comparative
advantage
Under increasing opportunity costs, there is incomplete
specialization in production in both nations.
The reason for this is that as Nation 1 specializes in the
production of X, it incurs increasing opportunity costs in
producing X.
3.4.4. The gains from exchange and from specialization
A nation’s gains from trade can be broken into two
components:
The gains from exchange
The gains from specialization
3.5. Trade based on differences in tastes
with increasing costs, even if two nations
have identical production possibility frontiers
(which is unlikely), there will still be a basis for
mutually beneficial trade if tastes, or demand
preferences, in the two nations differ.
The nation with the relatively smaller demand or
preference for a commodity will have a lower
autarky relative price for, and a comparative
advantage in, that commodity.
Illustration
A, A’ in isolation
PA < PA’ Nation 1
has a comparative
advantage in X and
Nation 2 in Y.
A(40,160)----B ---- C ---- E(60,180) gain 20 X + 20Y in Nation 1
A’(160,40)-----B’ ---- C’ ---- E’(180,60) gain 20X+20Y in Nation 2
Problem 5. (page 73)
On one set of axes,sketch Nation 1’s supply of exports of commodity X
so that the quantity supplied (QS) of X is QSx=0 at Px/Py=1/4, QSx=40
at Px/Py=1/2, QSx=60 at Px/Py=1, and QSx=70 at Px/Py=3/2, On the
same set of axes, sketch Nation 2’s demand for Nation 1’s exports of
commodity X so that the quantity demanded (QD) of X is QDx=40 at
Px/Py=3/2,QDx=60 at PxPy=1, and QDx=120 at Px/Py=1/2
(b) What would happen if Px/Py
were 3/2
Excess supply
If Px/Py=3/2, QSx=70;
QDx=40, Supply>Demand;
Px/Py will come down
Excess demand
(a) Determine the equilibrium relative
commodity price of the exports of
commodity X with trade.
(c) What would happen if
Px/Py=1/2
When Px / Py = 1, QSx = QDx = 60;
So, the equilibrium relative
commodity price of the exports of
commodity x with trade is 1
If Px/Py=1/2,
QSx=40; QDx=120,
Demand>Supply;
Px/Py will rise
Chapter 4
Demand and Supply, Offer Curves,
and the Terms of Trade
4.1 Theory of Reciprocal Demand
John Stuart Mill (1806-1873)
Essays on some Unsettled Questions of Political Economy (1844),
Principles of Political Economy (1848).
Main view on trade:
The actual price at which trade takes place depends
on the trading partners’ interacting demands.
4.2 The equilibrium relative commodity price with trade
--- Partial equilibrium analysis
4.3 Offer Curves
Alfred Marshall (1842-1924
The Pure Theory of Foreign Trade, 1879
Principles of Economics, 1890.
4.3.1 Definition of offer curves
( reciprocal demand curves)
offer curves of a nation shows how much of its import
commodity the nation demands to be willing to supply
various amounts of its export commodity.
The offer curve of a nation shows the nation’s
willingness to import and export at various relative
commodity prices.
4.3.2. Derivation and shape of the offer curve of Nation 1
4.3.3. Derivation and shape of the offer curve of
Nation 2
4.4 The equilibrium relative commodity price with trade
---- general equilibrium analysis
Only at this equilibrium price will trade be balanced between
the two nations.
4.4. Terms of trade
4.4.1. Definition of the terms of trade
The terms of trade of a nation are defined as the ratio of
the price of its export commodity to the price of its import
commodity.
Terms of trade = (Export Price Index / Import Price Index) X 100
N = ( Px / Pm ) x 100
An improvement in a nation’s terms of trade requires that the prices
of its exports rise relative to the prices of its imports over the given
time period.
Px = 105; Pm = 104;
Px = 96; Pm = 94;
Px = 106; Pm = 98;
A smaller quantity of export goods sold abroad is required to obtain a
given quantity of imports
What is a deterioration in a nation’s terms of trade ?
Commodity terms of trade, 1995 (1990=100)
Country
Export
Price index
Import
Price index
Terms of
Trade
Japan
United States
United kingdom
Germany
Canada
Australia
145
109
113
108
101
94
105
106
113
109
103
110
138
103
100
99
98
85
Japanese terms of trade rose by 38 percent (145/105)x100 over 1990
– 1995 period.
This means that to purchase a given quantity of imports, Japan had to
sacrifice 38 percent fewer exports;
Conversely, for a given number of exports, Japan could obtain 38 percent
more imports.
So. Japanese terms of trade improved. Whose terms of trade worsened?
Chapter 5 Factor Endowments and the(要素禀赋说）
Heckscher-Ohlin Theory （赫克雪尔-俄林定理）
(Trade Model Extensions and applications)
5.1 introduction
In 1919, Heckscher published “The Effect of Foreign
Trade on the Distribution of Income”
In 1933 Ohlin published
International Trade”
“Interregional
and
Ohlin was awarded the 1977 Nobel prize in economics
for his contribution to the theory of international trade.
5.2. Assumptions of the theory
(1) two nations, two commodities (X,Y), and two factors of
production (labor ,capital)
(2) Both nations use the same technology in production;
(3) The same commodity is labor intensive in both nations
X --- labor intensive ;Y---- capital intensive
(4)
Constant returns to scale;
(5) Incomplete specialization in production;
(6) Equal tastes in both nations;
(7) Perfect competition in both commodities and factor
markets;
(8) Perfect internal but no international mobility of factor;
(9) No transportation costs, tariffs, or other obstructions
to the free flow of international trade;
(10) All resources are fully employed;
(11) Trade is balanced.
5.3 Factor intensity, Factor abundance,
and the shape of the production frontier
5.3.1. factor intensity
The commodity Y is capital intensive if the capital-labor ratio
(K/L) used in the production of Y is greater than K/L used in
the production of X ( is not the absolute amount of K and L.)
In Nation 1, K/L in X: 1/4
in Y : 1
So, X is L- intensive
commodity; Y is K-intensive
In Nation 2, K/L in X: 1
in Y: 4
So, X is L-intensive
commodity, Y is K-intensive
The obvious question is : Why does Nation 2 use more K-intensive
production techniques in both commodities than Nation 1 ?
Why is capital relatively cheaper in Nation 2 ?
5.3.2. Factor abundance
a. In terms of physical units : the overall amount of capital
and labor available to each nation. The ratio of the total
amount of capital to the total amount of labor.
Nation 2 is capital abundant if TK2/TL2 > TK1/TL1
b. In terms of relative factor prices: the rental price of
capital and the price of labor time in each nation. The
ratio of the rental price of capital to the price of labor time
Pk/PL= r/w r: interest rate; w: wage rate
Nation 2 is capital abundant if PK2/PL2 < PK1/PL1
or
r2/w2 < r1/w1
5.3.3 Factor abundance and the shape of the
production frontier
Nation 1 is the L-abundant nation;
Y
X is the L-intensive commodity
Nation 2
So, Nation 1 can produce
relatively more of commodity x
Nation 1
X
5.4 The Heckscher-Ohlin Theory
(Factor proportions; Factor endowment theory)
5.4.1 views of the Heckscher - Ohlin theorem
1. Differences in relative factor endowments among nations
underlie the basis for trade.
2. A nation will export the commodity in the production of which a
relatively large amount of its abundant and cheap resource is
used.
3. Conversely, it will import commodities in the production of
which a relatively scarce and expensive resource is used.
4.With trade the relative differences in resource prices between
nations tend to be eliminated
5.4.2 General equilibrium framework of
the Heckscher - Ohlin theory
Tastes
Distribution of
ownership of
factors of
production
Demand for final
commodities
Derived demand
for factors
Commodity prices
Factor prices
Technology
Supply of factors
5.5 Illustration of the Heckscher - Ohlin Theory
5.6 Factor - Price Equalization and Income Distribution
Paul Samuelson ----- 1970 Nobel Prize
in economics
"International Trade and the Equalization of
Factor Prices", 1948
Factor-price equalization theorem referred
to as the H-O-S theorem
5.6.1 The factor-price equalization theorem
International trade will bring about equalization in
the relative and absolute returns to homogeneous
factors across nations.
Both relative and absolute factor prices will be equalized.
Nation 1 is Labor abundant
X is L-intensive commodity,
X is with comparative
advantage.
The relative price of labor (wage
rate) is lower
Nation 2 is capital abundant , Y is
K-intensive commodity, Y is with
comparative advantage.
The relative price of capital
(interest rate) is lower and the
relative price of labor is higher
Specializes in the production of
commodity X
Specializes in the production of
commodity Y,reduces
production of X (L-intensive)
The relative demand for labor
rises
The relative demand for labor
falls
Price of labor (wage) rises
Price of labor (wage) falls
5.6.2 Relative factor-price equalization
This is the process by which relative factor prices are equalized
Trade also equalizes the absolute returns to homogeneous factors.
5.6.3 Effect of trade on the distribution of income
1. Trade increases the prices of the nation’s abundant and
cheap factor ;
And reduces the price of its scarce and expensive factor
2. International trade causes real wages and the real income of
labor to fall in a capital-abundant and labor-scarce nation.
International trade causes real wages and the real income of
labor to rise in a labor-abundant and capital-scarce nation.
Should the U.S. government restrict trade?
The loss that trade causes to labor is less than the gain
received by owners of capital.
Exercise
Draw a figure similar to following figure but showing that the
Heckscher-Ohlin model holds, even with some difference in
tastes between Notion 1 and Nation 2
5.7 Empirical tests of the Heckscher-Ohlin model
5.7.1 The Leontief Paradox
The results of Leontief’s test: the United States export L-intensive
commodities and import K-intensive commodities.
Page 133. Case study 5-5
1947, U.S.A.
Export
Import Substitutes
$2550,780
$3091,339
Labor (man-years)
182
170
Capital/Labor
$14010
$18,180
Capital
5.7.2 Explanations of the Leontief Paradox
1. The year 1947 is too close to World War II to be representative.
2. The U.S. dependence on imports of many natural resources.
3. U.S. tariff policy
4. Ignored human capital (education, job training,and health embodied
in workers) U.S. labor embodies more human capital.
5. Factor-intensity reversal
A given commodity is the L-intensive commodity in the L-abundant
nation and the K-intensive commodity in the K-abundant nation
Chapter 6 New International Trade Theories
6.1 Theory of Increasing Returns to scale
6.1.1 Main views
(1).There is still a basis for mutually beneficial trade based
on economies of scale, even if two nations are identical in
every respect.
(2) When economies of scale are present, total world
output of both commodities will be greater than without
specialization
(3) With trade, each nation then shares in these gains.
6.1.2 Illustration of Trade based on Economies of scale
Nation 1: from A to B
Export X & import Y
from B to E
Nation 2: from A to B’
Export Y & import X
from B’ to E
Each nation would end up consuming at point E on
indifference curve II Which is higher than curve I
Examples:
U.S. exports
and theory
imports, 1995 (in Billions of Dollars)
6.2 Intra-Industry
Trade
Category
Export
Imports
(Differentiated Product Theory)
Autos
60.5
124.5
Intra-industry trade refers to the exchange between nations
Computers
of differentiated products of 39.6
the same industry .56.4
Telecommunications
equipment
19.8
15.3
paper
Chemicals
14.5
43.0
12.9
25.5
steel
Machine tools
5.8
5.2
23.0
16.1
6.6
24.1
6.6
7.9
3.9
2.4
Electrical generating
machinery
Meat products
Vegetables and fruits
6.2.1 main views of intra-industry trade theory
(differentiated products theory
(1) Intra-industry trade arises in order to take advantage of important
economies of scale in production.
(2) With differentiated products produced under economies of scale, pretrade relative commodity prices may no longer accurately predict the
pattern of trade.
(3) With intra-industry trade based on economies of scale it is possible
for all factors to gain.(will not lower the return of the nation’s scarce
factor.)
(4)Intra-industry trade is related to the sharp increase in international
trade in parts or components of a product.
6.2.2 Measuring intra-industry trade
Intra-industry trade index ( T )
T = 1 - IX – MI / (X + M)
X ----- the value of exports of a particular industry
M ----- the value of imports of a particular industry
If X=M T=1, intra-industry trade is maximum
If X=0,or M=o, T=0, NO intra-industry trade .
Example:
USA in 1995, export computers USD39.6 billion
Import computers USD56.4 billion
So, T = 1 – I39.6 – 56.4I/(39.6+56.4)
T = 0.825
6.3 Technological Gap Theory
(Innovation and Imitation Theory)
A country exports a new product produced with advanced technological
until imitators in other countries take away its market.
The innovating nation will have introduced a new product or process
Technological changes and innovation can affect comparative advantage
and the pattern of trade.
Q
Technological gap and international trade
Production in nation 1
Export of nation 1,import of nation 2
t0
t1
t2
t3
Export of nation 2,import of
nation 1
Imitation lag
Reaction lag
Demand lag
T
Mastery lag
Production in nation 2
6.4 Product Life Cycle Theory
Many manufactured goods undergo a predictable trade cycle.
During this cycle, a nation initially is an exporter, then loses its export
markets, and finally becomes an importer of the product.
A product goes through five stages:
(1) Manufactured good is introduced to home market. (new-product phase)
(2) Domestic industry shows export strength. (product-growth phase)
(3) Foreign production begins.(product maturity phase)
(4) Domestic industry loses competitive advantage.(product decline stage)
(5) Import competition begins.(product decline stage)
The product cycle model
Quantity
Stage 1
Stage 2
Stage 3
Stage 4
Stage 5
(New
product)
(Product
growth)
(product
maturity)
(product
decline)
(abdicate
market)
import
consumption
export
production
export
consumption
import
0
A
B
production
C
D
Innovating
country
imitating
country
Time
6.5 Transportation costs, Environmental
standards, and International Trade
6.5.1 Transportation costs and Non-traded Commodities
IP2 – P1I > Transportation cost
Traded commodities
IP2 – P1I < Transportation cost
Non-traded commodities
The price of non-traded commodities is determined by domestic
demand and supply conditions.
The price of traded commodities is determined by world demand and
supply conditions.
Partial Equilibrium analysis of Transportation cost
(2). Transportation costs
reduce the volume and gains
from trade.
(3). Transportation costs lead
to the different prices in two
nations for same commodity.
(4). Factor price will not be
completely equalized .
(1). Transportation costs reduce
the level of specialization in
production
(5) Transportation cost is
shared by the two
nations.
6.5.2 Transportation Costs and the Location of Industry
Resource-oriented industries
Market-oriented industries
Footloose industries
6.5.3 Environmental standards, Industry Location,
and international Trade
Chapter 7 The Theory of Protective Trade
7.1 The theory of protective tariff
Alexander Hamilton (1755-1804) 汉密尔顿
“Report on Manufactures” - submitted to Congress 1791
He recommended specific policies to encourage manufactures:
protective duties
prohibitions on rival imports
exemption of domestic manufactures from duties
encouragement of "new inventions . . . particularly those,
which relate to machinery."
7.2 The theory of protecting infant industry
List, (Georg) Friedrich ( 1789 --- 1846) (李斯特）
German-U.S. economist
His best-known work was
The National System of Political Economy (1841).
Political Economy (1827)
He first gained prominence as the founder of an association
of German industrialists that favored abolishing tariff barriers
between the German states
He maintained that a national economy in an early stage of
industrialization required tariff protection to stimulate
development
7.3 The theory of foreign trade multiplier
John Maynard Keynes (1883 – 1946)
“The General Theory of Employment, Interest and Money”
《就业、利息和货币通论》
7.3.1
Determination of the equilibrium national income
in a closed economy
Gross National Product (GNP)
Total final value of goods and services produced in a
national economy over a particular period of time,usually
one year.
National income (Y)
The sum of all payments made to sum factors of
production.
Equilibrium of National economy
GNP = Y
GNP = C + I
C ---- Total consumption
I ---- Total investment
Y=C+S
C+I=C+S
S ---- Total saving
I=S
7.3.2 The Multiplier in a Closed Economy
Y =Kx
K=
Y=C+S
I
Y
=
I
C
Y
Y
Y- C
I=S
Y=I+C
I=Y–C
1
=
1-
C
Y
Marginal propensity to consume (MPC)
K =
1
1 - MPC
Y =Kx
1
K =
1 - MPC
I
MPC = 0.9
K = 1 / 0.1 = 10
MPC = 0
K=1/1=1
MPC = 1
K=
S
Y
Y =
Marginal Propensity to Save (MPS)
C +
S
MPS = 1 - MPC
S = 1Y
C
Y
K = 1 / MPS
The closed economy Keynesian multiplier (K)
7.3.3 Equilibrium condition in an open economy
GNP = C + I + X
C --- domestic consumption
I --- domestic investment
X --- export
Y=C+S+M
S --- domestic saving
M --- import
GNP = Y
I+X=S+M
C+I+X=C+S+M
S–I=X–M
If S>I (domestic demand declines)
X should be increased
If S<I (higher domestic demand )
M should be increased
7.3.4 The foreign trade multiplier
I+X= S+M
I+
S
= MPS
X=
S+
M …….(1)
S = (MPS) ( Y ) ….. (2)
Y
Marginal Propensity to Save
M
= MPM
Y
I+
M = (MPM) (
Y ) ….. (3)
Marginal Propensity to import
X=
Y (MPS +MPM)
1
( I+ X)
Y=
MPS + MPM
1
Foreign trade multiplier (K’) is MPS + MPM
I+
X=
S+
M
X- M=
S
MPS = Y
S
I+
Y=
S
MPS
Y= 1
[
MPS
I+( X-
M )]
Y= 1
[
1-MPC
I+( X-
M )]
Y= 1 K [
1-MPC
I+( X-
M )]
Chapter 8 Trade Restrictions: Tariff Barriers
8.1 The tariff concept
8.1.1 definition
A tariff is a tax levied on a commodity when it crosses
the boundary of a customs area.
Import tariff, which is a tax levied on an imported product.
Export tariff, which is a tax imposed on an exported product.
8.1.2 purposes
Protective tariff is designed to insulate import-competing
producers from foreign competition.
Revenue tariff
is imposed for the purpose of generating tax
revenues and may be placed on both exports
and imports.
8.1.3 Means of Collecting Tariffs
specific tariff
a fixed amount of money per physical unit
of the imported product.
ad valorem tariff
compound tariff
a fixed percentage of the value of the
imported product.
a combination of a specific and an ad valorem
tariff.
8.2 Partial Equilibrium Analysis of a Tariff
a small nation imposes a tariff on imports competing with
the output of a small domestic industry. Then the tariff will
affect neither world prices nor the rest of the economy.
8.2.1 Partial Equilibrium effects of a Tariff
The trade effect
--- the decline in imports =
30X (BN+CM)
The Revenue effect
--- the revenue collected
by the government = $30
(MJHN)
The Consumption effect of the tariff --- the reduction in domestic
consumption = 20X (BN)
The production effect --- the expansion of domestic production
resulting from the tariff = 10X (CM)
Substitution effect or protection effect
8.2.2 Effect of a Tariff on consumer and Producer Surplus
consumer surplus
is difference between what consumers would be willing to pay for
each unit of the commodity and what they actually pay
Without tariff
When Q <, or =D0
Consumers would be willing
to pay OD0FG
g
Consumers actually pay
OD0FA
So, consumer surplus is:
AFG
When tariff = t and P=P*+t
Consumers would be willing to pay OD1EB. Consumers actually pay OD1EB
So, consumer surplus is: BEG
The tariff reduce the consumer surplus AFG – BEG = AFEB=a+b+c+d
Producer surplus
is the revenue producers receive over and above the minimum
amount required to induce them to supply the goods (profit)
Without tariff
Producer’s revenue = e+f
Producer’s cost = f
g
When tariff = t
Producer surplus = e
Producer’s revenue = a+b+e+f+g
Producer surplus = a+e
Producer’s cost = b+f+g
The tariff increases producer surplus by area a
8.3 The degree of protection afforded by a tariff
8.3.1 Tariff Level
Tariff Level = Amount of Import tariff / Amount of import x100%
Tariff Level = ∑C / ∑P = ∑(PxR) / ∑P
8.3.2 Nominal Rate of Protection --- NRP
NRP = (Pd – Pa) / Pa
Pd: the price of a commodity in domestic market
Pa : The price of a commodity in abroad market
NRP = tariff rate of the final commodity = t
(without considering the effect of exchange rate)
8.3.3 Effective Rate of Protection --- ERP
ERP indicates how much protection is actually provided to
the domestic processing of the import competing commodity
ERP signifies the total increase in domestic productive
activities (value added) that an existing tariff structure makes
possible, compared with what would occur under free-trade
conditions.
ERP =(V’ – V) / V
V’: value added in domestic productive activities
V: value added in abroad, free trade conditions
ERP =(V’ – V) / V
V’ = (P2 + C2) – (P1 + C1)
P2: price of final product
C2: amount of import duty of final product
P1: price of input
C1: amount of import duty of input
V = P2 – P1
So, ERP = (P2 + C2) – (P1 + C1) – (P2 – P1)
P2 – P1
=(C2 –C1) / (P2 – P1)
ERP = (C2 –C1) / (P2 – P1)
=
C2
C1 X P1
P2
P1
P2
1 – P1/P2
P1/P2 = ai the ratio of the cost of the imported input to the price of the final
commodity in the absence of tariffs
the nominal tariff rate on consumers of the final commodity
C2/P2 = t
C1/P1 = ti
the nominal tariff rate on the imported input
ERP =
t – ai X ti
1 – ai
8.3.4 Varies of tariff rate
Import Duty (Norma Tariff)
a. Common duties
b. Most – favoured Duties
Most – Favored – Nation Treatment
c. Preferential Duties
d. Generalized System of Preferences (GSP)
Import Surtax
a. Anti – Dumping duty
b. Anti – Subsidy duty
c. Emergency Tariff
d. Penalty Tariff
e. Retaliatory Tariff
Chapter 9
Non-tariff Trade Barriers and
the New Protectionism
9.1 Import quotas
a quota is the most important non-tariff trade barrier. It is a direct
quantitative restriction on the amount of a commodity allowed to be
imported or exported.
9.1.1 The effects of an import quota
Import quotas
---- used by all industrial nations to protect their agriculture
---- used by developing nations to stimulate import substitution of
manufactured products and for balance-of-payments reasons.
9.1.2 Comparison of an Import Quota to an Import Tariff
a. With a given import quota, an
increase in demand
higher domestic price and
greater domestic production
With a given import tariff, an
increase in demand
domestic price and domestic
production unchanged but will
result in higher consumption
and imports
b. The quota involves the distribution of import quota
monopoly profits
bribe government officials
c. An import quota limits imports to the specified level with
certainty, while the trade effect of an import tariff may be uncertain.
9.1.3 the forms of quotas
Global Quota (Unallocated Quota)
Autonomous Quota (Unilateral Quota)
Absolute Quota
Country Quota
Agreement Quota
Importer Quota
Tariff Quota
9.2
Other non-tariff Barriers
9.2.1 Voluntary Export Restraints (VERs)
An importing country induces another nation to reduce its exports
of a commodity “voluntarily,” under the threat of higher all-round trade
restrictions, when these exports threaten an entire domestic industry.
9.2.2 Import License System
Open General License --- OGL
Specific License ---SL
9.2.3
9.2.4
9.2.5
9.2.6
Foreign Exchange control
Advanced Deposit
Minimum Price
Internal Taxes
9.2.7 State Monopoly (State trade)
9.2.8 Discriminatory Government Procurement Policy
9.2.9 Customs Procedures
9.2.10 Technical Barrier to Trade
technical standard
health and sanitary regulation
packing and labeling regulation
9.3 Means of stimulating export and controlling export
9.3.1 Export Credit
Supplier’s credit
The exporter’s bank provide loans to the nation’s
exporters.
Buyer’s credit (Tied Loan)
exporter
The exporter’s bank provide
loans to foreign buyers or importer
bank.
Exporter’s
bank
Importer
Imorter’s
bank
Buyer’s credit
Supplier’s credit
Buyer’s credit
9.3.2 Export Credit Guarantee System
9.3.3 Dumping and Export Subsidies
Dumping is the export of a commodity at below cost or at least the
sale of a commodity at a lower price abroad than domestically.
Three forms of dumping
persistent dumping ----is the continuous tendency of a domestic monopolist to
maximize total profits by selling the commodity at a higher price in
the domestic market than internationally
Predatory dumping ----(Intermittent Dumping)
is the temporary sale of a commodity at below cost or at a lower
price abroad in order to drive foreign producers out of business, after
which prices are raised to take advantage of the newly acquired
monopoly power abroad.
Sporadic dumping ---is the occasional sale of a commodity at below cost or at a lower
price abroad than domestically in order to unload an unforeseen and
temporary surplus of the commodity without having to reduce
domestic prices.
Two forms of subsidy
Direct Subsidy
Indirect Subsidy
9.3.4 Exchange Dumping
Decreasing the exchange rate (devaluate the currency) to stimulate
the nations’ export
9.4 GATT and WTO
9.4.1 The General Agreement on Tariffs and Trade (GATT)
GATT signed by 23 nations in 1947(Oct. 30)
became effective on Jan. 1st 1948
to decrease trade barriers and to place all nations on an equal
footing in trading relationships.
9.4.2 The principles of GATT
a.
b.
c.
Nondiscrimination
The principles of most favored
nation and national treatment
The national-treatment principle
Elimination of non-tariff trade barriers
Consultation among nations in solving trade disputes
within the GATT framework.
GATT Negotiating Rounds
Negotiating
Coverage
Round
and
Addressed tariffs
Geneva (Swiss)
Annecy (France)
Torquay (U.K.)
Geneva
Dillon Round （Geneva)
Kennedy Round (Geneva)
Addressed tariff
non-tariff barriers
Tokyo Round
Uruguay Round
and
Date
Number of
Participants
Tariff Cut
Achieved (%)
1947
1949
1951
1956
1960-1961
1964-1967
23
33
39
28
45
54
21
2
3
4
2
54
1973-1979
1986-1993
99
117
33
34
9.4.3 The World Trade Organization
On January 1, 1995,
the Uruguay Round took effect,
GATT was transformed into the World Trade Organization.
9.4.4 How different is the WTO from the old GATT ?
a. The WTO is a permanent international organization, headquartered in
Geneva, Switzerland, while the old GATT was basically a provisional treaty
serviced
b. The WTO has a far wider scope than the old GATT, bringing into the
multilateral trading system, trade in services, intellectual property, and
investment.
c. The WTO also administers a unified package of agreements to which
all members are committed; in contrast, the GATT framework included
many side agreements whose membership was limited to a few nations.
d. The WTO reverses policies of protection in certain
“sensitive” areas (for example, agriculture and textiles) that
were more or less tolerated in the old GATT.
e. The WTO is not a government; individual nations retain their right
to determine how they will make national laws conforming to their
international obligations.
Chapter 10 Regional Economic Integration
10.1 The forms of economic integration
10.1.1 Preferential trade arrangements
----- provide lower barriers on trade among participating nations
than on trade with nonmember nations. This is the loosest form of
economic integration
ASENA (1967)----- Association of South East Asian Nations
Members: Indonesia, Malaysia ,the Philippines, Singapore, and
Thailand, Brunei, Vietnam
10.1.2 Free trade area
---- is the form of economic integration wherein all barriers are
removed on trade among members, but each nation retains its own
barriers to trade with nonmembers.
NAFTA (1993) ----North American Free Trade Agreement
Members: the United States, Canada, and Mexico
10.1.3 Customs union
---- allows no tariffs or other barriers on trade among members ,
and in addition it harmonizes trade policies (such as the setting of
common tariff rates) toward the rest of the world.
Benelux (1948)---- Belgium, the Netherlands, and Luxembourg
10.1.4 Common market
---- the free movement of goods and services among member nations;
The initiation of common external trade restrictions against members;
The free movement of factors of production across national borders within
the economic bloc
CACM (1960) --- Central American Common Market
Members: Costa Rica, El Salvador, Guatemala, Honduras, and Nicaragua
Economic union
----- goes still further by harmonizing or even unifying the
monetary and fiscal policies of member states. This is the most
advanced type of economic integration.
EU (1958/1994)---- The European Union
10.2 Trade-creating effect of customs unions
10.2.1 Trade creation
---- occurs when some domestic production of one customs-union
member is replaced by another member’s lower-cost imports.
Trade creation increases the welfare of member nations because it
leads to greater specialization in production based on comparative
advantage.
10.2.2 Illustration of a trade creating customs union
A. USD30
Tariff rate
100%
B. USD25
USD20
Nation 2
In Nation 1 Px = $1
In Nation 3 Px = $1.5
100% tariff rate of import
commodity X
Nation 2 import from Nation 1
= 50x – 20x = 30x
If Nation 2 now forms a customs union with Nation 1
Nation 2 import from Nation 1 = 70x – 10x = 60x
The area AGJC represents a transfer from domestic producers to
domestic consumers,
Net static gains to Nation 2 as a whole equal to $15
---- the areas of shaded triangles CJM + BHN
10.3 Trade-Diverting Customs Unions
10.3.1 Trade diversion
---- Occurs when lower-cost imports from outside the union are replaced
by higher-cost imports from another union member.
Trade-diverting customs union results in both trade creation and trade diversion,
therefore can increase or reduce the welfare of union members.
10.3.2 Illustration of a Trade-Diverting Customs Union
A $35
40%
B $26
x
C $20
Nation 2
S1 and S3 are the free trade perfectly
elastic supply curves of X of Nation 1
and Nation 3
With 100% tariff
Nation 2 import from Nation 1
= 50x – 20x = 30X
Forming a customs union with Nation 3 only;
Nation 2 import from Nation 3 = 45x
The welfare gain in Nation 2 from pure trade creation is $3.75
----- the sum of the areas of the shaded triangles.
The welfare loss from trade diversion is
10.4 Dynamic benefits from customs unions
10.4.1 Increased competition.
10.4.2 Economies of scale
10.4.3 Stimulus to investment.
10.4.4 Better utilization of the economic resources
of the entire community.